Category

Industrials Sector

Brief Industrials: AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank? and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?
  2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  3. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)
  4. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?

Screenshot%202020 02 27%20at%203.13.50%20pm

A meeting with AKR Corporindo (AKRA IJ) management in Jakarta last week, confirmed that despite last year’s issues over subsidised fuel pricing, the company is set up for strong growth going forward driven by a number of factors. These include strong growth in non-subsidized fuel distribution, and a marked pick-up in land sales at its JIIPE Surabaya Industrial estate, as well as longer-term a number of JV projects with BP PLC (BP/ LN) including retail petroleum distribution and aviation fuel distribution to begin with, and it is exploring the possibility of LNG storage and distribution. AKR Corporindo (AKRA IJ) should be a defensive stock in this environment and the recent correction is a buying opportunity.

The company ceased to distribute subsidized diesel in May 2019 due to a change in the pricing formula which made it uneconomic to do so. The change in pricing was to be applied retrospectively, which the company is challenging. The company is making a provision for the charge for this in 2019, on the advice of its auditors. AKR Corporindo (AKRA IJ) will resume subsidized fuel distribution this year as the new Minister reversed the pricing change, making it more economical to cover costs and assure a decent margin. 

AKR Corporindo (AKRA IJ) has been growing sales of non-subsidized fuel, which generates twice the margin as that of subsidized fuel, which is going some way to offset the decline in Subsidized fuel. Despite the potential charge, management has confirmed that FY19 Net profit will not be lower than the recurrent profit in 2018 of IDR712bn, which should be taken positively.

The company is moving forward with Freeport Mcmoran (FCX US) ‘s new smelter at the company’s JIIPE industrial estate (100 ha plot), which will bring with it leasing revenues, revenues from utilities, and demand for land plots from supporting industries. AKR Corporindo (AKRA IJ) secured a deal with the local government to supply power directly to its customers on its estate and will build a 515MW power plant there. The pipeline in demand at JIIPE could see a further boost with a Taiwanese steelmaker conducting a feasibility study for a 200 ha plot in 2020. 

AKR Corporindo (AKRA IJ) is trading at close to a 3-year low and its valuations are also approaching very attractive levels, with the stock trading on 11.5x FY20E PER plus it pays a good dividend, with an FY20E yield of 3.5%. 

2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

Image?1582850753

E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

3. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)

Chowontae

In this report, we provide a pair trade idea between Korean Air Lines (003490 KS) and Hanjin Kal Corp (180640 KS). Our strategy will be to go long Korean Air Lines and to go short on Hanjin Kal. Hanjin Kal Corp’s stock price is near its one-year highs and Korean Air Lines’ stock price is near its one-year lows. 

Our base case valuation of the company is 1.8 trillion won 30,476 won, which is 53% below the current share price. Some of the investors may be asking this question, “How can Hanjin Kal shares rise so much higher than its intrinsic value?” At this point, there are three major scenarios:

  • First, Hanjin Kal Corp shares may be valued correctly while Korean Air, Jin Air, and other Hanjin affiliates may be vastly underpriced and need to catch up to Hanjin Kal Corp.
  • Second, Hanjin Kal Corp shares may be overvalued right now while Korean Air, Jin Air, and other Hanjin affiliates may be fairly priced. (Our view)
  • Third, it could be a combination of the first two scenarios.

The key wildcards in this M&A fight have been Delta Air Lines and the Bando Group as both companies have been increasing their stakes of Hanjin Kal in the past several weeks. In the midst of this M&A fight, the COVID-19 has become a serious issue and likely to get worse in the coming weeks. Therefore, in the midst of a severe further downturn in the overall economy, especially in the construction sector (especially in the southeastern part of Korea), can the Bando Group continue to remain such a strong ally to KCGI and Cho Hyun-ah? This remains very shaky, in our view. 

4. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

Image 17126494871582841706083

Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

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Brief Industrials: Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets
  2. Activist Target Katakura (3001 JP) Announces BIG Buyback
  3. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants
  4. Singapore Air’s Massive Rights Issue
  5. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!

1. Potential Trade Ideas – Asia-Pacific Companies that May Access Capital Markets

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As global markets rebound and businesses start to feel impact of the virus outbreak, there will likely be companies looking to access capital markets to shore up their balance sheet. Singapore Airlines (SIA SP)‘s rights issue was a case in point.

In this insight, we will explore what are some Asia-Pacific companies that may breach their debt covenants and will likely look to raise capital in the near-term.

2. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

3. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants

Airlines debtratio

In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout. 

South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry. 

Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger  between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS)

COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.

4. Singapore Air’s Massive Rights Issue

This is worth having some Singapore Airlines (SIA SP) borrow.

SIA is seeking to raise S$5.3bn via a renounceable rights issue and an additional S$3.5bn via 10-year mandatory convertible bonds (MCBs).

1,777,692,487 rights will be issued at S$3.00/share – a 53.8% discount to last (S$6.50) and a 31.8% discount to TERP of S$4.40  – on a three rights for every two existing ordinary share basis.

Rights MCBs will be issued on the basis of 295 Rights MCBs for every 100 existing ordinary shares held by shareholders. The rights MCBs are convertible into fully paid-up new shares based on the conversion price of S$4.84, which is a 10% premium to the theoretical ex-rights price of S$4.40/share.

The rights issue is subject to approval by shareholders at an EGM – yet to be confirmed. At the EGM, SIA will seek be seeking shareholders approval for the further issuance of up to ~S$6.2bn additional MCB, “on terms that are substantially similar to the terms of the Rights MCBs and to be offered by the Company to Shareholders on a pro-rata basis by way of one or more further rights issues at such future dates and times as may be determined by the Company at its sole discretion. …   any such further rights issues of Additional MCBs will be undertaken within a period of 15 months commencing from the date of the approval by Shareholders for the issue of the Rights MCBs at the EGM”

Temasek, with 55.46% of SIA, has given an irrevocable undertaking to vote in favour of all resolutions at a forthcoming EGM; and to subscribe for its entitlement to the rights issue and rights MCBs; and to take up any unsubscribed rights shares and rights MCBs.

Entitlements for the rights shares and rights MCBs will be renounceable and expected to trade on the  SGX.
A rundown of terms and an indicative timetable below.

5. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!

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Lonking Holdings (3339 HK) is currently an 11.6% yielding stock, based on a final DPS of HK$0.25 and a share price of HK$2.16. For FY20F, we see the stock to still sit on a decent 8.9% dividend yield, despite business disruption from the Covid-19 outbreak. 

With a 43.7% YoY growth in reported profit, its FY19 result did not disappoint us, though the in-line core profit is relatively flat YoY. Gross margin has expanded on slightly lower revenue, indicating excellent cost control. We continue to hold that Lonking is well-positioned to capture the government’s post-outbreak infrastructure spending. Its net cash on hand of HK$0.63/share – some 29% of the share price – will help it navigate through the storm, in our view.

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Brief Industrials: Activist Target Katakura (3001 JP) Announces BIG Buyback and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Activist Target Katakura (3001 JP) Announces BIG Buyback
  2. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants
  3. Singapore Air’s Massive Rights Issue
  4. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!
  5. BTS Warrants – Expensive a Month Ago, Even Richer Now So Better to Bail

1. Activist Target Katakura (3001 JP) Announces BIG Buyback

Screenshot%202020 03 27%20at%2010.14.41%20pm

Friday 27 March, after the close, activist-targeted name Katakura Industries (3001 JP)announced, with its yuho and annual meeting, a buyback of up to 2.5mm shares (7.1% of shares out) for up to JPY 2 billion. 

The buyback will be conducted between 1 April 2020 and 31 March 2021.

There is a minor detail unspecified in the announcement (which is often specified) and the combination of the shareholder structure and trading patterns tells you what you need to know. 

Details below.

2. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants

Koreanair d

In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout. 

South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry. 

Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger  between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS)

COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.

3. Singapore Air’s Massive Rights Issue

This is worth having some Singapore Airlines (SIA SP) borrow.

SIA is seeking to raise S$5.3bn via a renounceable rights issue and an additional S$3.5bn via 10-year mandatory convertible bonds (MCBs).

1,777,692,487 rights will be issued at S$3.00/share – a 53.8% discount to last (S$6.50) and a 31.8% discount to TERP of S$4.40  – on a three rights for every two existing ordinary share basis.

Rights MCBs will be issued on the basis of 295 Rights MCBs for every 100 existing ordinary shares held by shareholders. The rights MCBs are convertible into fully paid-up new shares based on the conversion price of S$4.84, which is a 10% premium to the theoretical ex-rights price of S$4.40/share.

The rights issue is subject to approval by shareholders at an EGM – yet to be confirmed. At the EGM, SIA will seek be seeking shareholders approval for the further issuance of up to ~S$6.2bn additional MCB, “on terms that are substantially similar to the terms of the Rights MCBs and to be offered by the Company to Shareholders on a pro-rata basis by way of one or more further rights issues at such future dates and times as may be determined by the Company at its sole discretion. …   any such further rights issues of Additional MCBs will be undertaken within a period of 15 months commencing from the date of the approval by Shareholders for the issue of the Rights MCBs at the EGM”

Temasek, with 55.46% of SIA, has given an irrevocable undertaking to vote in favour of all resolutions at a forthcoming EGM; and to subscribe for its entitlement to the rights issue and rights MCBs; and to take up any unsubscribed rights shares and rights MCBs.

Entitlements for the rights shares and rights MCBs will be renounceable and expected to trade on the  SGX.
A rundown of terms and an indicative timetable below.

4. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!

2019%20revenue%20breakdown

Lonking Holdings (3339 HK) is currently an 11.6% yielding stock, based on a final DPS of HK$0.25 and a share price of HK$2.16. For FY20F, we see the stock to still sit on a decent 8.9% dividend yield, despite business disruption from the Covid-19 outbreak. 

With a 43.7% YoY growth in reported profit, its FY19 result did not disappoint us, though the in-line core profit is relatively flat YoY. Gross margin has expanded on slightly lower revenue, indicating excellent cost control. We continue to hold that Lonking is well-positioned to capture the government’s post-outbreak infrastructure spending. Its net cash on hand of HK$0.63/share – some 29% of the share price – will help it navigate through the storm, in our view.

5. BTS Warrants – Expensive a Month Ago, Even Richer Now So Better to Bail

Screenshot%202020 03 26%20at%202.53.06%20pm

The BTS Group Holdings PCL (BTS-W5 TB) warrants on BTS Group Holdings (BTS TB) were listed, and there were no buy opportunities. 

Instead, there were selling opportunities. And if you did not sell them then, you should think about doing so now.

The warrants are trading at an implied volatility exceeding that seen in the aftermath of the Thai floods in 2011, the demonstrations in 2013 and beyond, and any other time save the buy of BTSC in May 2010 which saw trading volumes rise 25-fold for a period of six months or more. 

The company has changed dramatically since then. 

Thailand has also become the latest country to implement a broad lockdown. Thailand’s Prime Minister Prayuth Chan-Ocha said two days ago a state of emergency will be declared for a month. Borders will be closed to foreigners starting today the 26 March; social gatherings are banned, domestic travel has been limited, and only essential shops remain open. From my sources, activity has already been considerably dampened. We can expect damage to BTS revenues. That damage will impact the share price’s ability to rebound to record new highs within the next 10 months so the warrants seem like an asset which will wither (if you are a vol trader, you know what you are getting into and different parameters apply).

More below.

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Brief Industrials: E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  2. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)
  3. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals
  4. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

1. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

Image?1582850753

E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

2. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)

Chowontae

In this report, we provide a pair trade idea between Korean Air Lines (003490 KS) and Hanjin Kal Corp (180640 KS). Our strategy will be to go long Korean Air Lines and to go short on Hanjin Kal. Hanjin Kal Corp’s stock price is near its one-year highs and Korean Air Lines’ stock price is near its one-year lows. 

Our base case valuation of the company is 1.8 trillion won 30,476 won, which is 53% below the current share price. Some of the investors may be asking this question, “How can Hanjin Kal shares rise so much higher than its intrinsic value?” At this point, there are three major scenarios:

  • First, Hanjin Kal Corp shares may be valued correctly while Korean Air, Jin Air, and other Hanjin affiliates may be vastly underpriced and need to catch up to Hanjin Kal Corp.
  • Second, Hanjin Kal Corp shares may be overvalued right now while Korean Air, Jin Air, and other Hanjin affiliates may be fairly priced. (Our view)
  • Third, it could be a combination of the first two scenarios.

The key wildcards in this M&A fight have been Delta Air Lines and the Bando Group as both companies have been increasing their stakes of Hanjin Kal in the past several weeks. In the midst of this M&A fight, the COVID-19 has become a serious issue and likely to get worse in the coming weeks. Therefore, in the midst of a severe further downturn in the overall economy, especially in the construction sector (especially in the southeastern part of Korea), can the Bando Group continue to remain such a strong ally to KCGI and Cho Hyun-ah? This remains very shaky, in our view. 

3. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

Image 17126494871582841706083

Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

4. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

Screenshot%202020 02 28%20at%2012.10.11%20am

Maeda Road Construction Co (1883 JP) today announced the start of talks with Nippo Corp (1881 JP) as a measure to counter Maeda Corp (1824 JP)‘s Tender Offer. 

It is a very hand-wave-y announcement with comments about cost pull, resource allocation, efficiencies, working towards the public good by constant improvement of social infrastructure, and then at the very end…

The two companies will proceed with the discussions on the specific terms of the alliance while complying with the antimonopoly law and other relevant laws and regulations.

The history here – the reason why that last line is needed – tells you something about what this announcement means. 

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Brief Industrials: A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play) and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)
  2. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals
  3. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

1. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)

Chowontae

In this report, we provide a pair trade idea between Korean Air Lines (003490 KS) and Hanjin Kal Corp (180640 KS). Our strategy will be to go long Korean Air Lines and to go short on Hanjin Kal. Hanjin Kal Corp’s stock price is near its one-year highs and Korean Air Lines’ stock price is near its one-year lows. 

Our base case valuation of the company is 1.8 trillion won 30,476 won, which is 53% below the current share price. Some of the investors may be asking this question, “How can Hanjin Kal shares rise so much higher than its intrinsic value?” At this point, there are three major scenarios:

  • First, Hanjin Kal Corp shares may be valued correctly while Korean Air, Jin Air, and other Hanjin affiliates may be vastly underpriced and need to catch up to Hanjin Kal Corp.
  • Second, Hanjin Kal Corp shares may be overvalued right now while Korean Air, Jin Air, and other Hanjin affiliates may be fairly priced. (Our view)
  • Third, it could be a combination of the first two scenarios.

The key wildcards in this M&A fight have been Delta Air Lines and the Bando Group as both companies have been increasing their stakes of Hanjin Kal in the past several weeks. In the midst of this M&A fight, the COVID-19 has become a serious issue and likely to get worse in the coming weeks. Therefore, in the midst of a severe further downturn in the overall economy, especially in the construction sector (especially in the southeastern part of Korea), can the Bando Group continue to remain such a strong ally to KCGI and Cho Hyun-ah? This remains very shaky, in our view. 

2. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

Image 17126494871582841706083

Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

3. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

Screenshot%202020 02 28%20at%2012.10.11%20am

Maeda Road Construction Co (1883 JP) today announced the start of talks with Nippo Corp (1881 JP) as a measure to counter Maeda Corp (1824 JP)‘s Tender Offer. 

It is a very hand-wave-y announcement with comments about cost pull, resource allocation, efficiencies, working towards the public good by constant improvement of social infrastructure, and then at the very end…

The two companies will proceed with the discussions on the specific terms of the alliance while complying with the antimonopoly law and other relevant laws and regulations.

The history here – the reason why that last line is needed – tells you something about what this announcement means. 

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Brief Industrials: Airports of Thailand (AOT): Fallen Enough? and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Airports of Thailand (AOT): Fallen Enough?
  2. Singpost (SPOST): Lasting Tough Times

1. Airports of Thailand (AOT): Fallen Enough?

Image 51513753031582693579061

In my inaugural insight on Thai stocks, Airports of Thailand (AOT): Yet to Fall , the company is just experiencing a drop in the number of tourists from China. This insight will discuss the management’s willingness to help its tenants’ survival during the COVID-19 period actually hurts more than it predicted. 

The management’s willingness to provide cushion for its tenants means that it has to lose a defensive part of the business (concession). BUY on weakness? Not yet, unfortunately…

2. Singpost (SPOST): Lasting Tough Times

Image 86957140621582738466003

The key problem is in the declining revenue from postal at an accelerating rate outpacing the growth rate from e-commerce business. This mismatch has happened for some time and unfortunately, it may not stop anytime soon. 

Unfortunately, the market for courier services for an e-commerce business is very crowded with Gogovan, Grab (0967655D SP) Express and Yamato Holdings (9064 JP) -backed TaQbin are scrambling for market share. Does Singpost stand a chance to grab the lion share of the business? It is a possibility but not without sacrificing their profitability. 

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief Industrials: Airports of Thailand (AOT): Fallen Enough? and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Airports of Thailand (AOT): Fallen Enough?
  2. Singpost (SPOST): Lasting Tough Times
  3. DP World Decides to Delist
  4. SITC International (1308 HK): Latest Update Post COVID-19 Outbreak

1. Airports of Thailand (AOT): Fallen Enough?

Image 51513753031582693579061

In my inaugural insight on Thai stocks, Airports of Thailand (AOT): Yet to Fall , the company is just experiencing a drop in the number of tourists from China. This insight will discuss the management’s willingness to help its tenants’ survival during the COVID-19 period actually hurts more than it predicted. 

The management’s willingness to provide cushion for its tenants means that it has to lose a defensive part of the business (concession). BUY on weakness? Not yet, unfortunately…

2. Singpost (SPOST): Lasting Tough Times

Image 86957140621582738466003

The key problem is in the declining revenue from postal at an accelerating rate outpacing the growth rate from e-commerce business. This mismatch has happened for some time and unfortunately, it may not stop anytime soon. 

Unfortunately, the market for courier services for an e-commerce business is very crowded with Gogovan, Grab (0967655D SP) Express and Yamato Holdings (9064 JP) -backed TaQbin are scrambling for market share. Does Singpost stand a chance to grab the lion share of the business? It is a possibility but not without sacrificing their profitability. 

3. DP World Decides to Delist

Image 55700672721582705070628

DP world has recently announced its intention to delist from Nasdaq Dubai citing the board’s decision that the disadvantages of remaining listed outweigh the advantages. Even though we share the company’s view, we believe the decision to delist will further deteriorate its already higher leverage. Moving forward, a lot will depends on the company’s ability to generate significant synergies from the recently concluded bolt-on acquisitions.

4. SITC International (1308 HK): Latest Update Post COVID-19 Outbreak

Work%20resumption%20percentage%20eng

We spoke with SITC International (1308 HK) on the impact of the COVID-19 outbreak. Its cargo volume has now returned to 80% of the normal post-CNY level with relatively stable freight rate, but unit cost for 1H20 will be higher due to lower utilisation. The exit of competitors provides it the opportunity to gain market share and further expand into Southeast Asia, which is positive to its long-term development. 

Similar to all transportation companies, SITC will experience a tough 1H20 with immense pressure which weakens its profitability in the period. However, SITC is among the most solid ones in the sector, with net cash on hand of over US$170m at end-FY19. Its share price is also resilient – down by just 9% from its pre-outbreak peak of HK$9.95.

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Brief Industrials: Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants
  2. Singapore Air’s Massive Rights Issue
  3. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!
  4. BTS Warrants – Expensive a Month Ago, Even Richer Now So Better to Bail
  5. Cosco Shipping (517 HK): Stock +6% YTD; 74 Managers Should Start to Care About Unlocking Value

1. Korean Air Lines: COVID-19 Could Lead to Breach of Debt Covenants

Koreanair 1

In this report, we analyze Korean Air Lines (003490 KS) with regards to the global COVID-19 outbreak which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout. 

South Korea’s government has already pledged loans of 300 billion won ($250 million) for the entire airlines in Korea. However, this is a TINY amount compared to the total amount needed to save this industry. This is also less than 1% of the $60 billion that the U.S. government has promised to its own air transport industry. 

Going forward, a question mark about Korean Air is guessing which airliner that the Korean government will bail out since it seems clear that it will not be able to bail out all the airlines in Korea. Because of the dire situation right now, there has also been an idea of a potential merger  between Korean Air Lines (003490 KS) and Asiana Airlines (020560 KS)

COVID-19 is a beast that will likely have the greatest-ever negative impact on the global airline industry in the past century. Many airlines are likely to become bankrupt in the next couple of years. There will be an intense industry consolidation. Korean Air faces an enormous challenge in the midst of this global COVID-19 pandemic, which is likely to lead to a breach of debt covenants resulting in a need for a massive capital raise and government bailout.

2. Singapore Air’s Massive Rights Issue

This is worth having some Singapore Airlines (SIA SP) borrow.

SIA is seeking to raise S$5.3bn via a renounceable rights issue and an additional S$3.5bn via 10-year mandatory convertible bonds (MCBs).

1,777,692,487 rights will be issued at S$3.00/share – a 53.8% discount to last (S$6.50) and a 31.8% discount to TERP of S$4.40  – on a three rights for every two existing ordinary share basis.

Rights MCBs will be issued on the basis of 295 Rights MCBs for every 100 existing ordinary shares held by shareholders. The rights MCBs are convertible into fully paid-up new shares based on the conversion price of S$4.84, which is a 10% premium to the theoretical ex-rights price of S$4.40/share.

The rights issue is subject to approval by shareholders at an EGM – yet to be confirmed. At the EGM, SIA will seek be seeking shareholders approval for the further issuance of up to ~S$6.2bn additional MCB, “on terms that are substantially similar to the terms of the Rights MCBs and to be offered by the Company to Shareholders on a pro-rata basis by way of one or more further rights issues at such future dates and times as may be determined by the Company at its sole discretion. …   any such further rights issues of Additional MCBs will be undertaken within a period of 15 months commencing from the date of the approval by Shareholders for the issue of the Rights MCBs at the EGM”

Temasek, with 55.46% of SIA, has given an irrevocable undertaking to vote in favour of all resolutions at a forthcoming EGM; and to subscribe for its entitlement to the rights issue and rights MCBs; and to take up any unsubscribed rights shares and rights MCBs.

Entitlements for the rights shares and rights MCBs will be renounceable and expected to trade on the  SGX.
A rundown of terms and an indicative timetable below.

3. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!

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Lonking Holdings (3339 HK) is currently an 11.6% yielding stock, based on a final DPS of HK$0.25 and a share price of HK$2.16. For FY20F, we see the stock to still sit on a decent 8.9% dividend yield, despite business disruption from the Covid-19 outbreak. 

With a 43.7% YoY growth in reported profit, its FY19 result did not disappoint us, though the in-line core profit is relatively flat YoY. Gross margin has expanded on slightly lower revenue, indicating excellent cost control. We continue to hold that Lonking is well-positioned to capture the government’s post-outbreak infrastructure spending. Its net cash on hand of HK$0.63/share – some 29% of the share price – will help it navigate through the storm, in our view.

4. BTS Warrants – Expensive a Month Ago, Even Richer Now So Better to Bail

Screenshot%202020 03 26%20at%202.53.06%20pm

The BTS Group Holdings PCL (BTS-W5 TB) warrants on BTS Group Holdings (BTS TB) were listed, and there were no buy opportunities. 

Instead, there were selling opportunities. And if you did not sell them then, you should think about doing so now.

The warrants are trading at an implied volatility exceeding that seen in the aftermath of the Thai floods in 2011, the demonstrations in 2013 and beyond, and any other time save the buy of BTSC in May 2010 which saw trading volumes rise 25-fold for a period of six months or more. 

The company has changed dramatically since then. 

Thailand has also become the latest country to implement a broad lockdown. Thailand’s Prime Minister Prayuth Chan-Ocha said two days ago a state of emergency will be declared for a month. Borders will be closed to foreigners starting today the 26 March; social gatherings are banned, domestic travel has been limited, and only essential shops remain open. From my sources, activity has already been considerably dampened. We can expect damage to BTS revenues. That damage will impact the share price’s ability to rebound to record new highs within the next 10 months so the warrants seem like an asset which will wither (if you are a vol trader, you know what you are getting into and different parameters apply).

More below.

5. Cosco Shipping (517 HK): Stock +6% YTD; 74 Managers Should Start to Care About Unlocking Value

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Cosco International Holdings (517 HK) has been a dreadful performer for years. Many would refer to it as a classic HK value trap. However, YTD the stock is up 6% which is impressive given overall equity markets performance.

The company just published its FY19 results which saw a sharp fall in revenues (-66% YoY as a business line was discontinued) but a large increase in profits (+16% YoY as associate income from various JVs increased almost 400%).

Most importantly in times of crisis is Cosco’s cash position which remains extremely large at 6.3 billion HKD (4.08 HKD/share) vs its share price at 2.2 HKD. The dividend payout ratio will be 76% which is in-line with the percentage payout the past few years. The total annual dividend yield is 7.8%. NAV/share is 5.17 HKD which means the stock trades at 0.42x NAV.

Most importantly, the company has now announced the details of its option scheme for 74 of its managers. This is the first time an option program has been announced and it is linked to higher ROE, rising operating revenue and EVA. The entire option pool is valued at 67M HKD (8.6M USD) at today’s valuation. Shareholders will have to approve the option scheme in an SGM on 06/04/20.

The question is: will this finally incentivize management to unlock value? No complicated financial engineering is needed. It is extremely straight forward. The cash balance of the company is nearly 200% higher than its current stock price. Cosco’s International Enterprise Value is NEGATIVE 2.6 billion HKD. Management can do a few things to better utilize its cash: 1) accretive M&A; 2) special dividends and 3) buybacks. All of these should increase the stock price. The biggest risk to investors is that management keeps on twiddling their thumbs and does not use its cash to create shareholder value.

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Brief Industrials: Singpost (SPOST): Lasting Tough Times and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Singpost (SPOST): Lasting Tough Times
  2. DP World Decides to Delist
  3. SITC International (1308 HK): Latest Update Post COVID-19 Outbreak

1. Singpost (SPOST): Lasting Tough Times

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The key problem is in the declining revenue from postal at an accelerating rate outpacing the growth rate from e-commerce business. This mismatch has happened for some time and unfortunately, it may not stop anytime soon. 

Unfortunately, the market for courier services for an e-commerce business is very crowded with Gogovan, Grab (0967655D SP) Express and Yamato Holdings (9064 JP) -backed TaQbin are scrambling for market share. Does Singpost stand a chance to grab the lion share of the business? It is a possibility but not without sacrificing their profitability. 

2. DP World Decides to Delist

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DP world has recently announced its intention to delist from Nasdaq Dubai citing the board’s decision that the disadvantages of remaining listed outweigh the advantages. Even though we share the company’s view, we believe the decision to delist will further deteriorate its already higher leverage. Moving forward, a lot will depends on the company’s ability to generate significant synergies from the recently concluded bolt-on acquisitions.

3. SITC International (1308 HK): Latest Update Post COVID-19 Outbreak

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We spoke with SITC International (1308 HK) on the impact of the COVID-19 outbreak. Its cargo volume has now returned to 80% of the normal post-CNY level with relatively stable freight rate, but unit cost for 1H20 will be higher due to lower utilisation. The exit of competitors provides it the opportunity to gain market share and further expand into Southeast Asia, which is positive to its long-term development. 

Similar to all transportation companies, SITC will experience a tough 1H20 with immense pressure which weakens its profitability in the period. However, SITC is among the most solid ones in the sector, with net cash on hand of over US$170m at end-FY19. Its share price is also resilient – down by just 9% from its pre-outbreak peak of HK$9.95.

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Brief Industrials: Singapore Air’s Massive Rights Issue and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Singapore Air’s Massive Rights Issue
  2. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!
  3. BTS Warrants – Expensive a Month Ago, Even Richer Now So Better to Bail
  4. Cosco Shipping (517 HK): Stock +6% YTD; 74 Managers Should Start to Care About Unlocking Value
  5. Hyundai Glovis/Mobis Pairs Trading: Now At -2.7σ & A New 2-Yr Low, Too Harsh to Miss Out

1. Singapore Air’s Massive Rights Issue

This is worth having some Singapore Airlines (SIA SP) borrow.

SIA is seeking to raise S$5.3bn via a renounceable rights issue and an additional S$3.5bn via 10-year mandatory convertible bonds (MCBs).

1,777,692,487 rights will be issued at S$3.00/share – a 53.8% discount to last (S$6.50) and a 31.8% discount to TERP of S$4.40  – on a three rights for every two existing ordinary share basis.

Rights MCBs will be issued on the basis of 295 Rights MCBs for every 100 existing ordinary shares held by shareholders. The rights MCBs are convertible into fully paid-up new shares based on the conversion price of S$4.84, which is a 10% premium to the theoretical ex-rights price of S$4.40/share.

The rights issue is subject to approval by shareholders at an EGM – yet to be confirmed. At the EGM, SIA will seek be seeking shareholders approval for the further issuance of up to ~S$6.2bn additional MCB, “on terms that are substantially similar to the terms of the Rights MCBs and to be offered by the Company to Shareholders on a pro-rata basis by way of one or more further rights issues at such future dates and times as may be determined by the Company at its sole discretion. …   any such further rights issues of Additional MCBs will be undertaken within a period of 15 months commencing from the date of the approval by Shareholders for the issue of the Rights MCBs at the EGM”

Temasek, with 55.46% of SIA, has given an irrevocable undertaking to vote in favour of all resolutions at a forthcoming EGM; and to subscribe for its entitlement to the rights issue and rights MCBs; and to take up any unsubscribed rights shares and rights MCBs.

Entitlements for the rights shares and rights MCBs will be renounceable and expected to trade on the  SGX.
A rundown of terms and an indicative timetable below.

2. Lonking (3339 HK): Wow! It Is Yielding 11.6%!!!

Image?1585232499

Lonking Holdings (3339 HK) is currently an 11.6% yielding stock, based on a final DPS of HK$0.25 and a share price of HK$2.16. For FY20F, we see the stock to still sit on a decent 8.9% dividend yield, despite business disruption from the Covid-19 outbreak. 

With a 43.7% YoY growth in reported profit, its FY19 result did not disappoint us, though the in-line core profit is relatively flat YoY. Gross margin has expanded on slightly lower revenue, indicating excellent cost control. We continue to hold that Lonking is well-positioned to capture the government’s post-outbreak infrastructure spending. Its net cash on hand of HK$0.63/share – some 29% of the share price – will help it navigate through the storm, in our view.

3. BTS Warrants – Expensive a Month Ago, Even Richer Now So Better to Bail

Screenshot%202020 03 26%20at%202.53.06%20pm

The BTS Group Holdings PCL (BTS-W5 TB) warrants on BTS Group Holdings (BTS TB) were listed, and there were no buy opportunities. 

Instead, there were selling opportunities. And if you did not sell them then, you should think about doing so now.

The warrants are trading at an implied volatility exceeding that seen in the aftermath of the Thai floods in 2011, the demonstrations in 2013 and beyond, and any other time save the buy of BTSC in May 2010 which saw trading volumes rise 25-fold for a period of six months or more. 

The company has changed dramatically since then. 

Thailand has also become the latest country to implement a broad lockdown. Thailand’s Prime Minister Prayuth Chan-Ocha said two days ago a state of emergency will be declared for a month. Borders will be closed to foreigners starting today the 26 March; social gatherings are banned, domestic travel has been limited, and only essential shops remain open. From my sources, activity has already been considerably dampened. We can expect damage to BTS revenues. That damage will impact the share price’s ability to rebound to record new highs within the next 10 months so the warrants seem like an asset which will wither (if you are a vol trader, you know what you are getting into and different parameters apply).

More below.

4. Cosco Shipping (517 HK): Stock +6% YTD; 74 Managers Should Start to Care About Unlocking Value

517%20hk%20company%20overview%20march%202020

Cosco International Holdings (517 HK) has been a dreadful performer for years. Many would refer to it as a classic HK value trap. However, YTD the stock is up 6% which is impressive given overall equity markets performance.

The company just published its FY19 results which saw a sharp fall in revenues (-66% YoY as a business line was discontinued) but a large increase in profits (+16% YoY as associate income from various JVs increased almost 400%).

Most importantly in times of crisis is Cosco’s cash position which remains extremely large at 6.3 billion HKD (4.08 HKD/share) vs its share price at 2.2 HKD. The dividend payout ratio will be 76% which is in-line with the percentage payout the past few years. The total annual dividend yield is 7.8%. NAV/share is 5.17 HKD which means the stock trades at 0.42x NAV.

Most importantly, the company has now announced the details of its option scheme for 74 of its managers. This is the first time an option program has been announced and it is linked to higher ROE, rising operating revenue and EVA. The entire option pool is valued at 67M HKD (8.6M USD) at today’s valuation. Shareholders will have to approve the option scheme in an SGM on 06/04/20.

The question is: will this finally incentivize management to unlock value? No complicated financial engineering is needed. It is extremely straight forward. The cash balance of the company is nearly 200% higher than its current stock price. Cosco’s International Enterprise Value is NEGATIVE 2.6 billion HKD. Management can do a few things to better utilize its cash: 1) accretive M&A; 2) special dividends and 3) buybacks. All of these should increase the stock price. The biggest risk to investors is that management keeps on twiddling their thumbs and does not use its cash to create shareholder value.

5. Hyundai Glovis/Mobis Pairs Trading: Now At -2.7σ & A New 2-Yr Low, Too Harsh to Miss Out

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Hyundai Glovis/Mobis pair generally makes an excellent duo for pairs trading. The 2-yr correlation coefficient is 0.76. As shown in the below scatter plot, the duo has a highly cointegrated relationship.

The pair is currently at -2.7σ on a 20D MA. The price ratio is now hitting a new 2-yr low at 0.52577.

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